The sweet smell of success in terms of higher productivity and reduced absenteeism does not involve paying staff more money, or adding the word "manager" to their job titles. It may simply be a case of letting them follow their noses.

Retailers have long recognised the positive effects that smells can have on the cash register. Supermarkets lure shoppers with wafts of baking bread and firms such as Co-op Travel sell more foreign holidays via essence of coconut. Now the office world, too, is seeking its own unique aroma to lift employees' spirits and even reduce mistakes.

A recent study in a financial services company concluded that staff made 40% fewer errors when surrounded by the smell of cinnamon. Another employer used lavender to soothe the stressed-out staff at a frenetic call centre.

Valerie Edwards Jones, a microbiologist at Manchester Metropolitan University, is "very excited" at the impact of smell on work performance. After five years of joint research with the fragrance company Scent Technologies, she says that the power of aroma to alter human mood is unarguable. "Although some members of the scientific community are cynical," she says, "there is already an impressive body of evidence to suggest that our sense of smell is profoundly important.

"We are also now looking at how natural oil essence can reduce the bacteria count in an office and even reduce staff sickness levels."

Despite the Big Brother connotations of squirting mood-enhancing smells into the workplace via air cooling systems or stand-alone "fragrance delivery" machines, the use of aromas to get up the noses of employees is on the increase.

Signature Aromas currently supplies more than 40 different natural, oil-based fragrances such as spring meadow or melted chocolate to clients including HSBC, Texaco and Honda UK (which for some time has used essence of cherry to combat the stench of smoking rooms).

"Japanese employers routinely use their air-conditioning systems to disperse 'wake-up' fragrances such as citrus early in the morning, floral notes to boost concentration when the late morning hubbub is at its height and woody scents like cedar or cypress to relieve tiredness in the afternoon," says Brian Chappell, the director of Signature Aromas.

"In this country, though, where the use of fragrance in the workplace is still highly controversial, most of our clients refuse to talk about the issue."

C Interactive, a client of Scent Technologies, had initial reservations when it decided to introduce citrus smells into its sales office to boost alertness. "We didn't really expect anything much to happen and started off surreptitiously, with an aroma box that looked like an air vent, because we weren't sure of the staff would like the idea," says Daniel Graham, the joint managing director of the marketing agency that supplies music and messaging technology to call centres and shopping centres.

However the effects were so dramatic that the company explained to its sales staff their new enthusiasm for work. "Since introducing aroma machines into the office, our turnover has increased by 10%, absenteeism is down and we have a far more energised sales force," says Graham. "We got a few adverse comments, which we entirely expected, but as long as the smell is oil-based and natural, rather than harsh and chemical, people welcome the effect it has on their mood."

Less welcome was C Interactive's trial of orange essence - a known appetite stimulant - which was hurriedly abandoned when staff became noticeably hungrier for food than for closing important sales deals.

There is nothing illegal about an employer using smells to motivate the workforce, but firms that choose to introduce them covertly could be in breach of contract. "There is plenty of case law to suggest that employers have the right to run their businesses as they see fit, and that would certainly include using aromatic infusions in the office if they genuinely believed they could improve performance," says Jonathan Brain at the law firm Mills Kemp and Brown. "But introducing aromas without consent could put the employers themselves in breach of contract, particularly if a member of staff had an allergy to the fragrance."

Many employers have formulated HR policies to deal with the impact of rank breath on enclosed office spaces, but few have yet understood the impact of smell outside the issue of staff BO. While Signature Aromas stresses that its products are based on natural oils, Chappell says HR practitioners are wary of even openly discussing the notion of corporate fragrance, let alone formulating policy on it. "It's easier to pump a single smell into an open-plan office and hope that all staff like it, but we prefer to individualise our work," he says. "It is now possible to surround Fred in accounts with leather, Chloe in sales with lemon and Matt in distribution with Old Spice - without affecting the noses of colleagues."

Although problems may arise when leathery Fred needs to broach lemony Chloe's work space in order to discuss Matt's leaving collection, Chappell's mission to imbue Britain' offices with subtle fragrance is challenged only by the curiously indefinable smell of money. "We've been asked for some very strange aromas by companies looking to stage presentations or business events, and while many - such as human sweat or horse manure - are easy to replicate, others, such as burnt matches, PVC and money, pose great problems.

"The company that really can create the smell of hard cash, perhaps for an investment bank, will make a fortune."